What are dominant assurance contracts?


Dominant assurance contracts are designed to solve the problem of public goods contribution by addressing the free rider problem. In a dominant assurance contract, individuals are incentivized to contribute towards a public good because they benefit regardless of the project's success. If the project succeeds, contributors benefit from the public good. If it fails, contributors receive a refund bonus, ensuring they are not at a disadvantage for having committed funds. This setup contrasts with traditional crowdfunding models, like Kickstarter, as it guarantees a refund with an additional bonus if the funding target is not met, eliminating the risk of loss while encouraging contributions. This mechanism has been shown effective in the lab, potentially doubling the success rate of projects compared to traditional assurance contracts 1.

Dominant Assurance Contracts

Alex explains how dominant assurance contracts can solve the contribution problem for public goods, making it a dominant strategy to contribute. While it doesn't solve all problems, experiments have shown that it can double the success rate of projects compared to traditional assurance markets.

The Lunar Society

Alex Tabarrok - Prizes, Prices, and Public Goods